Nominally Sovereign Debt, Risk Shifting, and Reputation
This paper analyzes a reputational equilibrium in a model in which nominally denominated sovereign debt serves to shift risk associated with the unpredictability of tax revenues from the sovereign to its lenders. The analysis answers the following set of related questions: Why would a sovereign refrain from inflating when faced with servicing a large quantity of nominal debt? If a sovereign does not plan to use inflation to repudiate its nominal debts, why would it want to issue nominal debt in the first place? What are the distinguishing features of those sovereigns who are willing and able to issue nominal debts?
|Date of creation:||May 1987|
|Date of revision:|
|Publication status:||published as Journal of Economics and Business, Vol. 45, Nos. 3 & 4, pp. 341-352 (August , October 1993)|
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- Lucas, Robert Jr., 1986. "Principles of fiscal and monetary policy," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 117-134, January.
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- Herschel I. Grossman, 1987. "A Generic Model of Monetary Policy, Inflation, and Reputation," NBER Working Papers 2239, National Bureau of Economic Research, Inc.
- Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
- Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers.
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